Doritos Taco Keeps YUM Looking Tasty

In a strong uptrend, Yum Brands remains a solid momentum name

For fast-food connoisseurs, the only thing that might elevate one’s favorite menu item is the deliciously sinful addition of another familiar junk food. Such is the thinking behind the Doritos Taco, the latest offering from Taco Bell. The subsidiary of Yum! Brands (NYSE:YUM) launched a taco with a nacho cheese Dorito-flavored shell at midnight on March 8.

YUM was spun off from PepsiCo (NYSE:PEP) in 1997, so this synergy — which takes advantage of PepsiCo’s Frito-Lay division — is only fitting. (In fact, one wonders why Taco Bell’s marketing guys didn’t come up with this earlier.) The Doritos taco is the biggest launch in Taco Bell’s half-century history, involving $75 million in advertising and new machinery at four Frito-Lay plants to manufacture the special shells.

It’s therefore a relief that early anecdotal evidence indicates the new menu item is a hit. Over the weekend, I headed to my closest Taco Bell, right across the street from Wrigley Field (that’s how committed I am to journalism). The employee at the counter said the new product had been “very popular” and that eager Doritos fans were lined up ahead of the taco’s midnight launch on Thursday.

I didn’t exactly have the intended experience — because I’m a pseudo-vegetarian, I subbed beans for the ground beef. The packaging was clever (reminiscent of a nacho-cheese Doritos bag), and the shell, well, looked like a nacho cheese Dorito. The flavor wasn’t quite cheesy enough, however, and my filling of choice made the whole experience similar to eating seven-layer dip with Doritos (not necessarily a bad thing).

Still, a worthy experiment. Two moderately enthusiastic thumbs up.

While Taco Bell has had its share of struggles, including E. coli and salmonella outbreaks and allegations about the quality of its beef, YUM as a stock has been going strong. The company, which is also the parent of KFC and Pizza Hut, has seen its shares grow by 80% in the past two years (and 30% over the past six months).

Analysts are bullish on the shares: 13 of the 18 brokerages following the stock have named it a buy or better. Jim Cramer said last week that he remains optimistic on the company. Earnings grew 13.9% year-over-year and are expected to keep growing at an annual pace of 14.5% over the next three-to-five years.

Options traders, on the flip side, have shown a propensity for put options. The stock’s put/call open interest ratio (for the next three months’ worth of options) is 1.77, meaning open puts nearly double open calls in the March, April, and July series combined. The most-popular option currently is the March 60 put (expiring this week and out-of-the-money by more than $7). It’s possible, however, that these were originally sold to open as a moderately bullish strategy.

Investors who are bullish on YUM but want another way of playing the shares without buying the stock outright could also consider put selling. This is a way to generate modest premium on an uptrending stock, and it’s also a method of getting “paid to wait” to acquire an equity at a lower price.

For example, the April 65 put could be sold for about 95 cents. If YUM stays above the 65 strike through April expiration (i.e., moves higher, stays put, or even drops slightly), the put seller keeps this premium collected as profit. If YUM is trading below 65 at expiration, the put seller will likely be assigned and required to buy the shares (at a reduced price of $64.05). Note that some brokers may require investors to have the cash on hand to fulfill this obligation. For more specific details about the cash-secured put strategy, check out this piece from the Options Industry Council.

Have you tried the Doritos taco? If so, what do you think? Will it be popular enough to have a measureable impact on YUM’s financial backdrop?

As of this writing, Beth Gaston Moon does not own any shares mentioned here.